READY, AIM, FIRE
by Denis Burns

Follow these steps when selling your practice. We look at how to make your business as appealing as possible to prospective buyers.

REMEMBER THAT OLD HUNTING ADAGE OF "READY, AIM, FIRE"?   Not only does this sound advice work well for a young hunter, but it is also applicable when preparing to sell your insurance practice.

As with hunting, if you do any of those three steps out of order, you will most likely not achieve the "big prize" that you had your heart set on, but rather a "good enough" end result. "Aim, fire, ready" and "fire, ready, aim" may land you the wrong buyer, and undervalued offer or the headache of having to quickly develop the requested financial materials later.

Focus on the "ready" in the hunt for a buyer.  Your financial statements are the most important documents when determining what your practice is worth and what is reasonable to ask of a buyer.

The most important way to increase the value of your practice, as well as improve the interest level of your buyer, is to thoroughly prepare the business for sale. This preparation must come well in advance of any other actions associated with the sale of your practice, probably as much as six to 12 months before the sale. This allows you the time to develop your financial statements and correct any unresolved financial issues. Skip this step and you could miss the buyer completely or sell your business for too low of a price.

Preparation for sale begins with knowing the real value of your practice. This can be established by understanding its true profit potential. Perhaps you earned $100,000 last year in net profit; however, was every expense incurred essential to your business success? If not, create a separate document or balance sheet that omits the unessential expenses. For example, automobile expenses, country clubdues and dining and entertainment charges may be not be necessary for continued success of your practice. If such items are included in your company financial report, make the buyer aware and offer the supporting documentation to further clarify and show actual value.

As a mergers and acquisition CPA, I often see business owners who overlook these these type of expenses. Not long ago, I represented an insurance agent in a sale of his practice who was also an avid hunter. The agent used hunting as a way to entertain and attract new clients. He spent thousands of dollars on his Texas hunting lease, planting crops for the wildlife, purchasing and maintaining housing and entertainment while hunting. We successfully added these expenditures back when valuing the business and increased the sales price by almost a quarter of a million dollars.

It is important to note that generally an insurance or financial services practice sells on its ability to produce income for a potential buyer. The assets the practice owns are not always representative of its true value. And the net income of the practice is multiplied by a factor ranging from three to five, when calculating the valuation of the firm and the sales price. For instance, if you are able to add back $100,000 of nonessential expenses, the value of the practice would increase by a whopping $300,000 to $500,000.

The value of a firm is represented in these financial documents. These documents can make or break a sale. If your're not comfortable with your accounting abilities, I recommend that you seek outside counsel and engage the services of a highly experienced CPA firm. A CPA firm can help to organize your financial information and prepare your statements for delivery to an interested party.

Buyers evaluating your business generally require at least three years of financial information. The more formal your statements (a CPA firms' audited, reviewed or compiled report vs. internally generated statements), the better impression you'll make and the easier the due diligence process is for the buyer. Buyers fear risk. Audited and reviewed financial statements by an outside firm may reduce the perception of risk to the buyer. Tax returns may suffice as well, but do not show you true earning potential as nonessential expenses were not counted as income.

Prepare charts and graphs demonstrating the positive aspects of your business. This should include sales and net income growth, annual reocurring revenue; anything that is positive about the business needs to be communicated to the buyer. Organized and visually appealing material will help convey the message that your business is worth the investment.

Normally, adjustments are made to the seller's financial records to remove the nonessential operating expenses. These adjustments must be clearly reflected on the financial records so that the buyer, in reviewing, can trace back the original records and financial statements. Any confusion or error in this process will cause the buyer to lose confidence in the seller's financial report. This loss of credibility could result in a request of a much greater scope of analysis by the buyer, a reduced offer or even a lost sale.

Be sure that your organizational paperwork is complete and up to date. Review your incorporation papers, permits, tax returns, licensing agreements, leases and customer and agency contracts. Make certain that all files are readily available, current and in order; and prepare a complete inventory of assets. Formalize records and document all business dealings for the convenience of the buyer. Tie up all loose ends before inviting a buyer into the business and, if possible, close any pending new-client transactions. Review leases and real estate contracts. You do not want the location of the business to affect the sale. If the location can be a hinderance to the sale, consider moving to a better location before inviting a buyer in.

In order to have a successful hunt, a hunter must employ a deliberate and precise strategy to get his prize. Hunting a successful buyer for your insurance and/or financial services practice requires the same "ready, aim, fire" strategy. Proper implementation of this strategy could produce the greatest trophy of your life.

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At Burns & Company, P.C., we are prepared to utilize all of our resources to assist in making your purchase, sale or merger a success.  We are experienced in representing buyers, sellers and merger partners in all aspects of the process, and work closely with the other professionals (brokers, attorneys, credit officers, etc.) on your team.